In 2003 consumers purchased $45 billion in stored value card (SVC) credits from card issuers who are retailers, mall offices, banks, card associations, and travel service providers. In the marketplace SVC are commonly referred to as gift, prepaid, or traveler's money card programs.
The majority of SVC issuers provide consumers with mag strip cards that are connected to a host-client network system. Consumers use their cards to initially load and reload funds at remote terminals, e.g. cash registers, POS terminals, Internet web site POS terminals, etc.
After value has been added to a SVC, consumers use their card to make purchases for goods and/or services at (a) merchants who issue cards (a “closed” loop system) or (b) banks who issue cards and provide cardholders with the opportunity to use their cards at multiple and diverse merchants (an “open” system).
In return for selling and reloading SVCs, merchants have benefited by consumers spending more than the face value of the card, the float on the money held in their SVC account until the funds are debited, and the “breakage” amount that occurs when customers abandon 10–15% of the funds that they deposited into a SVC account.
When banks sell SVC cards, they benefit from charging customers loading fees on the amount of funds they deposit, float fees on the funds maintained in the accounts, and interchange fees when customers make purchases at participating merchants or use ATM machines for cash.
Along with the outstanding success that merchants and banks are gaining from offering the current SVC programs, they are also experiencing the following problems (a) Consumers do not own any merchandise or services when they purchase SVC credits; therefore, if an issuer goes out of business or becomes insolvent, the consumers loses the funds they deposited into their SVC funds. (b) When issuers accept SVC funds, they cannot be recorded as an immediate sale; therefore, the issuer cannot report the transaction as revenue. (c) Issuers have to wait until cardholders debit their accounts before they can declare any revenue. (d) The “breakage” amount that occurs when customers abandon 10–15% of the funds, has until recently been the property of the issuer. Now issuers are being challenged by state treasuries, invoking existing “unclaimed property laws”, to turn over the funds to the state. As the impact of this process expands, it is entirely possible that merchants will lose all rights to the “breakage” funds that they were formerly able to keep. (e) Furthermore, with the introduction of state treasuries in the mix, issuers are now being required to maintain costly SVC accounting records and conduct audits for yearly reporting to the respective state treasuries. (f) In order to deal with the growing elimination of “breakage” funds, issuers have attempted to put expiration dates on their SVCs. As a result of this very unpopular tactic, a growing number of states have outlawed issuers from using expiration dates for SVCs. and (g) As another way to recoup from losing “breakage” funds, issuers have also instituted monthly charges (avg. $2.50) when SVC accounts are not being used. In response to this compensatory initiative, again a growing number of states have passed laws blocking issuers from charging non-user fees.
In analyzing the above cited problems, it is obvious there are two major limitations within the current SVC system. They are (a) issuers accept funds from consumers with the expectation that they have made a sale and (b) consumers turn over funds to issuers with the understanding they now own some merchandise or services, for themselves or as a gift for others.
However, in reality, both parties do not receive what they want. The fact is issuers are really selling “financial credits” to consumers for future ownership of goods or services.
In the future, such “credits” can then be exchanged for merchant supplied goods and services. Consequently, under the current system, merchants do not have a sale until the customer cashes the “credits” in for goods and services. Therefore, as it now stands, merchants do not have any guarantee that there will ever be a sale.
Under the current system merchants have to wait until the customer redeems the financial credits for goods or services. Only at that time does a merchant have reportable revenue from their growing sales of gift, prepaid, or traveler's money cards. As a result of the delay in timing, merchants are increasingly being forced to under report what they think are their legitimate sales. By increasingly under reporting their sales, merchants now are asking the question: “Will this phenomena, have a negative impact on their corporate earnings, valuations, and the price of their company's stock?”
Lastly, after a time of nonuse, some states are viewing the remaining balances in SVCs as being “unclaimed property”. Under such a declaration, state treasuries can implement escheat laws and require issuers to surrender the unused funds to the respective state treasuries.
Once “unclaimed property” laws are called to action—customers, issuers, city and state sale tax authorities, and the Internal Revenue Service—will all lose the rights to the funds that issuers and consumers—upfront agreed—to be used to conveniently purchase goods and services.
Accordingly, in light of the above, it would be advantageous to improve the existing gift, prepaid, traveler's money cards so that once funds are entered into the system there is an immediate and recognizable sale of goods or services. Once this occurs, all the above cited problem factors (“a” through “g”) by definition and classification are eliminated from occurring. The method and system that can provide order and purpose to this payment option is a merchandise card.